What qualifies for private residence relief?
Private residence relief is a well-known relief but one which is often misunderstood. It applies to remove the liability to capital gains tax that would otherwise apply where a homeowner makes a gain on the disposal of their only or main residence.
Like all reliefs, it is dependent on the associated conditions being met. Further, the fact that a property is lived in as a home prior to disposal does not in itself mean the gain will be exempt in full.
Scope of the relief
Private residence relief applies to the gain accruing to an individual which is attributable to the sale of all or part of a ‘dwelling house’ which is or has been during the individual’s period of occupation his or her only or main residence and also any land which the individual has for their own occupation and enjoyment with that residence as it garden or grounds up to the permitted area.
What is a ‘dwelling house’
The term ‘dwelling house’ is simply the building in which the individual lives. This may be a house, a flat or a bungalow. Alternatively, it may comprise a caravan or a boat if this is where the individual resides.
Land and gardens
Private residence relief also extends to land and gardens that are enjoyed with the home. The legislation caps this at an area of 0.5 of an hectare (the ‘permitted area’). However, a larger area may fall within the exemption where this is considered reasonable with regard to the size and character of the property, although the exemption will not cover land in use for other purposes, such as agriculture or use in a trade. By contrast, land used as a paddock or an orchard may form part of the grounds if there is no significant business use.
The land must be sold with the property or before it – if the land is sold separately after the sale of the residence, the relief will not apply.
Only or main residence
The relief applies to the only or main residence. Where a person has more than one property, they can elect which one is their main residence for the purpose of the relief. However, only properties that are lived in as a residence can be a main residence. An election to specify a property as a main residence must be made within two years of the date on which the latest residence is acquired. In the absence of an election, it is a question of fact as to which is the main residence.
Married couples and civil partners
Married couples and civil partners only have one main residence for capital gains tax purposes between them.
Final period exemption
Where a property has at some time been an individual’s only or main residence, the last nine months of ownership are covered by the relief, regardless of whether the property is occupied as an individual’s main residence at that time. Where a person sells their home to go into care, the final period of exemption is 36 months.
If a property has been occupied as an individual’s only or main residence for the full period for which the individual has owned the property, the relief applies to the full gain made on disposal, so no chargeable gain arises.
If the property has been an individual’s only or main residence for some but not all the time that they have owned it, partial relief is available. The gain is time apportioned and the relief applies to the period for which the property is occupied as an only or main residence, plus the last nine months. Any remaining gain is liable to capital gains tax to the extent not sheltered by losses or the annual exempt amount.
First-time buyer relief - SDLT & investment property trap
First-time buyer relief may reduce the stamp duty land tax (SDLT) that a first-time buyer pays when they buy their first home in England or Northern Ireland. A similar scheme applies in Scotland for Land and Buildings Transaction Tax (LBTT), but there is no first-time buyer relief from Land Transaction Tax in Wales. This articles focuses only on the SDLT relief.
Higher residential threshold
The SDLT relief for first-time buyers takes the form of a higher residential threshold. The normal residential threshold is £125,000. However, this is increased to £300,000 for first-time buyers buying their first home costing £500,000 or less.
Where the relief applies, no SDLT is charged on the first £300,000 of the purchase consideration, with the balance of the consideration (up to £500,000) liable to SDLT at 5%. Where the consideration is more than £500,000, the relief does not apply; first-time buyers pay SDLT as for other buyers to the extent that the consideration exceeds £125,000.
Betty is a first-time buyer. She buys her first property, a 2-bed house, in June 2022 for £280,000, which she will live in as her main home. As the consideration is less than £500,000, first-time buyer relief applies. The consideration is below the SDLT first-time buyer threshold of £300,000, so Betty does not have to pay any SDLT.
Libby also buys her first home in June 2022. The property costs £350,000. She too benefits from SDLT relief. No SDLT is payable on the first £300,000, but SDLT at 5% is payable on the remaining £50,000. She therefor pays SDLT of £2,500.
Eliza buys her first home, a flat in London, in June 2022. The flat costs £700,000. As the consideration is more than £500,000, she is unable to benefit from first-time buyer relief. Consequently, she must pay SDLT of £25,000 ((£125,000 @ 0%) + (£125,000 @ 2%) = (£450,000 @ 5%)).
Buying an investment property
In areas such as London, where property prices are high, many would-be first-time buyers are unable to afford a property. Further, where the price is more than £500,000, first-time buyer relief is not available.
To overcome some of these difficulties and to get onto the first rung of the ladder, an option may be to buy an investment property in a cheaper area. However, for first-time buyers wishing to take advantage of first-time buyer relief to cut their SDLT bill, there is a sting in the tail – the relief is not available unless the first-time buyer intends to occupy the property as their only or main residence. Consequently, first-time buyers buying an investment property to enable them to get on the property ladder must pay SDLT at the usual rates where the consideration exceeds £125,000.
National Insurance changes from July 2022
Although the National Insurance rates and thresholds for 2022/23 had already been set, at the time of the Spring Statement in March 2022, the Chancellor announced increases in the primary threshold which would align the starting point for National Insurance with the personal allowance from 6 July 2022. However, as the increase does not take effect until part way through the 2022/23 tax year, the two not fully aligned until 2023/24. The lower profit limit for Class 4 contributions was also increased.
Employees pay primary Class 1 National Insurance contributions on their earnings to the extent that these exceed the primary threshold. For 2022/23, contributions are payable at the main rate of 13.25% on earnings between the primary threshold and the upper earnings limit, and at the additional rate of 3.25% on earnings in excess of the upper earnings limit. Employees are treated as having paid contributions at a notional zero rate on earnings between the lower earnings limit and the primary threshold. This has the effect of ensuring that the year is a qualifying year for state pension purpose if the employee has earnings at least equal to 52 times the weekly lower earnings limit.
The lower earnings limit is £123 per week (£533 per month; £6,396 per year) and the upper earnings limit is set at £967 per week (£4,189 per month; £50,270 per year) for 2022/23.
The primary threshold was initially set at £190 per week (£823 per month; £9,880 per year). These thresholds now only apply from 6 April 2022 to 5 July 2022. From 6 July 2022, the primary threshold is aligned with the personal allowance, and from 6 July 2022 to 5 April 2023 is set at £242 per week (£1,048 per month; £12,570 per year). As the increase takes effect three months after the start of the 2022/23 tax year, the annual primary threshold for 2022/23 is £11,908. This will be of relevance to directors with an annual earnings period. The increase in the thresholds does not affect any liability for primary contributions for any tax week commencing before 6 July 2022.
As a result of the increase in the primary threshold, employees will pay less National Insurance from July onwards. There is no change to the secondary thresholds.
Imogen is paid £2,000 per month.
For April to June 2022 inclusive, she pays primary contributions of £155.95 per month (13.25% (£2,000 - £823)).
However, from July 2022, her monthly primary contributions fall to £126.14 (13.25% (£2,000 - £1,048)).
The increase in the primary threshold means that from July she is £29.81 better off each month.
The employment allowance reduces the secondary contributions payable by the employer. The allowance is set at £5,000 for 2022/23, having been increased by £1,000 following the Spring Statement. Eligible employers should remember to claim the allowance.
The starting point for Class 4 contributions is aligned with the primary threshold for Class 1 purposes. To keep the alignment in light of the increase to the primary threshold from July 2022, the lower profits limit for 2022/23 has been increased from £9,880 to £11,908. The increase applies from 6 April 2022.
Managed lets – is VAT due on recharged expenses
If you use an agent to manage a let property, they may incur expenses, such as repairs and cleaning costs, on your behalf and recharge these to you.
Where this is the case, will you need to pay VAT on those expenses?
Recharge or disbursement?
Where costs are incurred by the agent and passed onto the landlord, it is necessary to determine whether the cost is a recharge or a disbursement. This is an important distinction as the VAT treatment differs.
A payment made to a supplier on behalf of a customer is called a disbursement. This would be the case, for example, if the letting agent arranged for a plumber to repair a shower in a let property and paid the repair on the landlord’s behalf, passing the cost onto the landlord.
The letting agent does not need to charge VAT when passing on the cost of the disbursement to the landlord – it is the landlord rather than the customer who receives the service.
For a payment to qualify as a disbursement, all of the following conditions must be met:
the letting agent paid the supplier on the landlord’s behalf and acted as the agent of the landlord;
the landlord received, used or had the benefit of the goods or services paid for on their behalf;
it was the landlord’s responsibility to pay for the goods and services not the letting agents;
the letting agent had the landlord’s permission to make the payment;
the landlord knew that the goods and services were from another supplier not from the letting agent;
the costs are shown separately on the statement/invoice;
the exact amount paid to the supplier is passed on to the landlord; and
the goods and services paid for by the letting agent are paid for in addition to the agents own services.
Jane uses a letting agent to manage her buy-to-let. The tenants report a problem with mice. The agent contacts Jane to advise her and she ask that they sort the problem on her behalf. The agent gets a quote from a pest control specialist for the work, which is £180. Jane agrees the quote.
The work is carried out. The bill is paid by the letting agent and passed on to Jane (being deducted from her rental income for the month). The payment is a disbursement so the letting agent does not need to add VAT to the amount passed on to Jane. The amount paid on Jane’s behalf of £180 is deducted from her rental income for the month.
By contrast, a cost that is incurred by the letting agent that is recharged to the customer must be included in the VAT charged to the landlord. This will apply to incidental business expenses and costs incurred by the letting agent. Examples would be services provided by the letting agent, for example cleaning and gardening, and recharged travel expenses for visits to check on the property.
The letting agent can reclaim any input VAT incurred on these costs, but must charge VAT on the amount charged to the landlord.
The letting agent incurs travel cost of £20 when visiting a landlord’s property to carry out a viewing. The letting agent recharges the cost to the landlord. The letting agent (who is VAT registered) must charge VAT in the recharged expense.
Is your business an 'adventure in the nature of trade'?
Sometimes it is evident that a trade is being undertaken -- a plumbing business, a manufacturing business, an accountant or solicitor are all 'trades'. However, not all trading activities are easily identifiable. If you buy and sell a property in relatively quick succession for example, is that a trade in HMRC's eyes or investment? Each source of income is taxed differently so the distinction is important. Generally, profits made from the sale of land and buildings are taxable under the capital gains tax (CGT) rules which, in most circumstances, results in a lower tax bill than profits charged to income tax.
There is a definition of 'trade' to be found in both the Income Tax Act 2007 and the Corporation Tax Act 2010 but it is far from being clear stating that a trade is 'any venture in the nature of trade'. It has therefore been left to case law to delve deeper into the meaning. Using the various cases that have come before the courts in the last 20 years HMRC have compiled what are termed ‘badges of trade’.
At present HMRC lists nine 'badges of trade' being:
If any of the 'badges' are present in a transaction then HMRC may argue that any 'profit' is taxable as income, and while the existence of one badge can be enough to confirm an activity as trading, this need not necessarily be the case.
From the decided court cases that have been held, it is clear that no one 'badge' is more persuasive than another. Neither do all 'badges' have to be present. It is possible for more than one badge of trade to apply without an activity counting as trading. For example, it is clear that having an intention to make a profit can indicate a trading activity, however by itself this is not enough. In the 1979 case of Salt v Chamberlain 53TC143, a research consultant made an overall loss on the Stock Exchange after trying to forecast the market. The loss was made over several years and over 200 transactions. The court decided that this was not a trade as share trading by a private individual can never be subject to any of the badges of trade. Therefore the transactions were subject to CGT.
One recent court case where many of the 'badges' were considered was Mark Campbell v HMRC 2022 TC08398. In this case the court concluded that the purchase, modification and sale of four properties in five years was not trading and was therefore subject to CGT rather than income tax. HMRC brought the case because they had information that Mr Campbell had acquired and disposed of four properties between 2010 and 2015 selling each one for more than he paid. The court decided that, while they agreed that profits had been generated from the activities, on balance, the activities were not trading. The decision was made by considering the following factors relating to 'badges of trade':
Use the property allowance & renting your drive
The summer is a popular time for events and event parking is often limited. If you have a drive or field that you do not use, you could consider renting it out to make some money. This need not give rise to a tax headache.
However, it should be remembered that all income from renting UK property owned by the same person or persons forms a single UK property business. Consequently, if a person has other rental properties, rental income from renting a driveway cannot be considered in isolation; instead it forms part the income of the existing property business.
Nature of the property allowance - The property allowance is a £1,000 tax free allowance which enables an individual to earn tax-free income from property of up to £1,000 a year.
If property income is less than £1,000, there is no need to tell HMRC about it or to return it on the self-assessment tax return.
Example - Peter lives in Wimbledon. He has space on his drive for two cars in addition to his own car. During the Wimbledon fortnight he rents out each space for £30 a day. During Wimbledon 2022 he makes £720 from renting his drive.
He has no other income from property.
As the income from property is less than £1,000, he is able to enjoy it tax-free and does not need to report it to HMRC.
Income exceeds £1,000 - An individual can still take advantage of the £1,000 property allowance even if their income from property is more than £1,000 in the tax year. The allowance can be deducted from the income to arrive at the taxable profit. This will be beneficial where the actual expenses are less than £1,000.
Example - Petra lives near a popular outdoor concert venue. During July and August she rents a parking space on her drive. In 2022, this generate her income of £1,500. She incurs expenses of £200 in advertising the space and associated administrative costs.
She has no other property income.
As her income exceeds £1,000, she must tell HMRC about it. However, she can take advantage of the property allowance to reduce the tax that she pays on that income.
If Petra does not claim the property allowance, her taxable profit will be £1,300 (rental income of £1,500 less expenses of £200). However, by claiming the allowance, she is able to reduce her taxable profit to £500 (rental income of £1,000 less property allowance of £1,000). Claiming the allowance will save her tax of £160 if she is a basic rate taxpayer and £320 if she is a higher rate taxpayer.
Expenses of more than £1,000 - Claiming the property allowance will not be beneficial if associated expenses are more than £1,000. Where this is the case, it is better to deduct the actual expenses.
Example - Paul has a field that he is uses to offer event parking. In July 2022, he makes rental income of £8,000. He also incurs expenses of £1,200 on staff and admin costs.
If he calculates his rental profit in the usual way, his taxable profit is £6,800 (£8,000 - £1,200). However, if he claims the property allowance, his rental profit increases to £7,000 (£8,000 - £1,000). Claiming the property allowance is not worthwhile.
LossesIt is also better not to claim the allowance where deducting expenses from rental income would give rise to a loss so as to preserve the loss. The deduction of the allowance cannot create a loss. However, this will involve some administration and completion of the return. Consequently, if rental income is less than £1,000 and there is little opportunity to use the loss, claiming the property allowance may be the preferred option.
Relief for homeworking expenses post Covid-19
The Covid-19 pandemic forced large numbers of employees to work from home for the first time. Having made the transition to home working, post pandemic, many employees have continued to work from home some or all of the time.
Employees who work from home may incur costs as a result, such as increased household bills. The tax legislation allows employers to make a tax-free payment of £6 per week (£26 per month) to employees who work from home at least some of the time to help them meet the costs. The payment can be made tax-free regardless of whether the employee works from home through choice.
If the employer does not contribute towards the costs of additional household expenses, the employee may be able to claim tax relief. During the Covid-19 pandemic, the conditions were relaxed and employees who were required to work from home during the pandemic were able to make a claim of £6 per week for 2020/21 and 2021/22 for the full tax year (even if they returned to the office for some of the year). However, the easement came to an end on 5 April 2022, and for 2022/23 onwards relief is only available where the employee is required to work from home (either by the employer or the nature of the work), but not where the employee has the option to work at home or at the employer’s premises but chooses to work from home.
Hybrid working arrangements are attractive because of the flexibility that they offer. However, the choice element will limit to ability to claim a deduction for household expenses. Requiring the employee to work from home on, say, one specified day of the week will open the door to a claim.
Where an employee works from home, depending on the nature of their job, they may need equipment to enable them to do so. Where the employer provides homeworking equipment, no tax liability arises in respect of that equipment.
During the Covid-19 pandemic, the rules were relaxed so that where an employee purchased homeworking equipment, the cost of which was later reimbursed by the employer, the reimbursement was not taxed. If the employer did not reimburse the cost, the employee could claim a tax deduction.
However, this easement ended on 5 April 2022. The strict statutory rules now apply, and as employees are not able to claim a deduction for capital expenditure (such as the cost of a computer), where this cost is reimbursed by the employer, the reimbursement will be taxable.
However, a deduction is allowed for revenue expenses wholly, necessarily and exclusively incurred in undertaking the employment duties, and any reimbursement of those costs can be made tax-free.
Tax relief for bad debts
Bad debts are a fact of business life and most businesses will suffer a bad debt from time to time. This may be because the customer goes out of business after the work has been done or the goods have been supplied, or runs into financial difficulty resulting in them defaulting on the debt. Unfortunately, sometimes the customer may just not pay and refuse all attempts to recover it.
While there are actions that the business can take to recover the debt (such as making a claim using the Money Claim Online service), there is no guarantee that these will work, and the business may simply have to accept that the debt has gone bad.
Having suffered a bad debt, it would be adding insult to injury if the business had to pay tax on income that had not actually received. Fortunately, the tax system offers some relief for bad debts.
The way in which relief is given depends on whether the accounts are prepared under the cash basis or the accruals basis.
One of the advantages of the cash basis is that it provides automatic relief for bad debts. Under the cash basis, income is not recognised until it is received, so if an invoice is not paid, it is not taken into account when calculating taxable profits. Consequently, there is no need for special rules to deal with bad debts.
Traders with cash basis receipts of £150,000 or less can elect to use the cash basis. It is the default basis for landlords with rental cash basis receipts of £150,000 or less, and landlords not wishing to use the cash basis must elect for the accruals basis to apply. Companies cannot use the cash basis to prepare their accounts.
Under the accruals basis, income must be recognised when earned. This means that if work is undertaken, the associated income is taken into account when the work is done not when the invoice is paid. Consequently, the invoiced amount will be reflected in the calculation of taxable profit, regardless of whether it has been paid. The amount owing will show in the balance sheet as a debtor of the business.
Normally, a deduction is not allowed for a debt owed to a business in computing the taxable profit. However, an exception is made for a bad debt and for a doubtful debt to the extent that it is estimated to be bad. This will be the total amount of the debt less any amount that the business may reasonably expect to receive.
Where a debt is bad or doubtful, a deduction can be made in the period in which the debt became bad or doubtful. This may not necessarily be the same period as when the income is taxed if at that point it was expected that the debt would be paid.
ABC Ltd prepares accounts to 31 March each year. As a company, it prepares accounts using the accruals basis.
On 21 March 2022 it invoices a customer for £3,000.
The invoice is taken into account in calculating the taxable profit for the year to 31 March 2022.
In July 2022, the customer went into liquidation without paying the debt. Recovery looks very unlikely.
Tax relief is given in the form of a deduction of £3,000 when calculating the profit for the year to 31 March 2023 as this is the period in which the debt went bad.
Post cessation receipts and expenses – tax treatment
Sometimes a business may have ceased trading but then receives income or incurs expenses that have not been included in the final cessation accounts e.g. an insurance payment may be received or a debt that the business owner thought would never be paid is paid. Such receipts would have arisen due to the previous carrying on of the trade. Any such income is charged to tax separately from the profit of the trade (i.e. the previous cessation period is not reopened) but the receipt is still taxed as trading income. A business that has ceased trading may also find itself paying expenses after cessation. Examples include the costs relating to the collection of debts taken into account in computing earlier trade profits before the trade ceased and remedying what is found to be defective work carried out before cessation.
A deduction is allowed for a loss or expense which, if the trade had not ceased would have been deducted in calculating the profits of the trade for corporation or income tax purposes, or would have been deducted from or set off against the profits of the trade. Such allowable expenses can be offset against any post cessation receipts. However, if the business does not have any post-cessation receipts, relief may still be available for post-cessation bad debts and certain specified expenses (broadly expenses incurred in remedying defective work or paying associated damages). Relief is given sideways against other income and capital gains of the same year and must be claimed by 31 January but one from the end of the tax year in which the payment was made e.g. if a qualifying payment is made in 2022/23, relief must be claimed by 31 January 2025. If an expense cannot be fully relieved using any of these methods then it is carried forward to be deducted from any post cessation receipts that may be received in the future, otherwise it is lost.
If the post-cessation receipts arise within six years of cessation, the person receiving the income can elect to carry back the receipts to the date of cessation
If there are insufficient post-cessation receipts against which to offset the post-cessation expenses, (i.e. there is a loss), then there is a restriction on the amount of claimable expenses can be allowed against the other net income or capital gains for the tax year in which they are paid. The set off is subject to the £50,000 or 25% of adjusted total income cap. The relief is also restricted by the amount of any unpaid debts owed by the trader at the date of cessation. If an unpaid debt restricted the amount of relief in an earlier tax year, it is not allowed in a later year either. However, if the outstanding debt is repaid, the payment is a ‘qualifying payment’ and can be relieved.
HMRC’s latest on MTD ITSA
HMRC has finally set out its new timetable and criteria for joining its Making Tax Digital pilot. When will you be able to sign up and should you bother?
At the end of 2021 HMRC said that early in 2022 it would widen the availability of its Making Tax Digital for Income Tax Self Assessment ( MTD ITSA ) pilot for businesses. However, it’s taken it until half way through the year to do so and importantly well past the start of the 2022/23 tax year.
MTD ITSA becomes obligatory in April 2024 and will initially be for landlords, sole traders and self-employed individuals, not partnerships or companies. The latter need not concern themselves with the pilot.
One of the main features of MTD ITSA is online quarterly reporting of business income and outgoings to HMRC. The trouble is that businesses able to join the pilot under the new criteria won’t be able to do so until July after the first quarterly reporting period has ended. If you join you’ll have little time (especially as the holiday season is upon us) to ensure that your records for the past quarter meet the MTD ITSA requirements in time to submit the first report due on 5 August 2022.
During the pilot period there are no penalties for submitting late quarterly reports. So, if you’re keen to join the pilot during 2022/23, while you must submit all four reports for the year you’ll be able to catch up for any quarter you’ve missed without the risk of being penalised.
Possibly a bigger stumbling block if you want to join the pilot is the very limited range of software available. MTD ITSA reports can only be made using compatible software. There are currently only three HMRC-approved providers. The big names such as Xero, Sage, Intuit Quickbooks and many others are still working on their products. If your provider is not on the short approved list for MTD ITSA software, we recommend waiting to join the pilot until it is rather than changing software at this stage.
The new criteria apply from July 2022. You can join the pilot if your bookkeeping software is compatible but currently there are only three such providers. You can join later but you’ll need to submit retrospective reports
How to claim the IHT transferable nil rate band
For inheritance tax (IHT), there are potentially two nil rate bands available. The first – the nil rate band – is available to everyone and is set at £325,000 until 5 April 2026. An estate does not have to pay any IHT up to this amount.
The second nil rate band is the residence nil rate band (RNRB). This is available where the main residence is left to a direct descendant, such as a child or grandchild. The RNRB is set at £175,000 until 5 April 2026. However, unlike the nil rate band, the RNRB is tapered where the value of the estate is more than £2 million. The RNRB is reduced by £1 for every £2 by which the value of the estate exceeds £2 million, meaning that it is not available to estates valued at £2.35 million and above.
Spouses and civil partners
An IHT inter-spouse exemption means that no IHT is payable on anything that a person leaves to their spouse or civil partner.
Each spouse/civil partner has their own nil rate band and RNRB for IHT purposes. The IHT rules also allow any portion of the nil rate band or RNRB which is not used on the death of the first spouse/civil partner to be transferred to the surviving spouse/civil partner and claimed by their executors on their death. This is useful where a couple wish to leave their estate to their surviving spouse/civil partner in the first instance and to their children following the surviving spouse/civil partner’s death, but do not want to waste their nil rate bands.
Transferring the nil rate band
The percentage of the nil rate band that was not used when the first spouse/civil partner died can be used by the surviving spouse/civil partner’s estate as long as:
the couple were married or in a civil partnership when the first death occurred; and
the unused nil rate band is claimed within two years of the death of the surviving spouse or civil partner.
It is important to note that it is the unused percentage of the nil rate band that is transferred, not the absolute amount. This provides an automatic adjustment if the nil rate band changes between the first death and the second death.
The way in which the claim is made depends on whether a full IHT return (IHT400) is needed. If a full return is required, the claim should be made on form IHT402, which should be sent to HMRC with the IHT400 (and any other forms that are required). The IHT400 should be sent to HMRC within 12 months of the date of death.
If the death occurred after 1 January 2022 and the estate is an excepted estate, the transferable nil rate band can be claimed when applying for probate.
Transferring the unused RNRB
As with the nil rate band, the unused percentage of the RNRB is available on the estate of the surviving spouse or civil partner. Again, this must be claimed. This is done on form IHT435 which should be sent to HMRC with the IHT400.
Polly died in June 2017 leaving her estate valued at £600,000 to her husband Paul. At the time of her death, the nil rate band was £325,000 and the RNRB was £100,000.
Paul dies in May 2022. He leaves his entire estate, valued at £1.4 million to his daughter Poppy. In addition to his nil rate band of £325,000 and his residence nil rate band of £175,000 his estate is able to claim the unused portion of Polly’s nil rate band and RNRB, which is 100% in each case. Consequently, Paul’s estate is able to benefit from a further nil rate band of £325,000 and a further residence nil rate band of £175,000. As it is the unused percentage that is transferred, Paul’s estate benefits from 100% of the RNRB at its value of the time of his death (i.e. £175,000), rather than the absolute value of the RNRB at the time of Polly’s death (i.e. £100,000). Consequently, IHT is only payable to the extent that the value of his estate exceeds £1m (2x £325,000 + 2 x £175,000).
Are you trading?
It will not always be apparent when a hobby tips over into a trade and the point at which you need to declare your income to HMRC. There is no statutory definition of a trade beyond that a trade includes a ‘venture in the nature of a trade’. Consequently, in deciding whether a trade exists, HMRC look to the ‘badges of trade’. These are indicators of trading developed from case law.
The badges of trade
There are nine badges of trade.
Profit-seeking motive: an intention to make a profit support trading but is not by itself conclusive.
The number of transactions: systematic and repeated transactions will suggest a trade.
The nature of the asset: is the asset of a type than can only be turned to advantage by sale, does it yield an income or does it provide ‘pride of possession’ (for example, a picture for personal enjoyment). An asset which is acquired for sale would suggest trading, whereas an asset acquired to yield an income would suggest an investment.
Existence of similar trading transactions or interests: transactions that are similar to those of an existing trade may themselves be trading.
Changes to the asset: has the asset been repaired, modified or improved to make it more easily saleable of saleable at a greater profit?
The way in which the sale was carried out: was the asset sold in a way that was typical of a trading organisation, which would suggest the existence of a trade, or did it have to be sold to raise cash in an emergency?
The source of finance: was money borrowed to buy the asset and could the funds only be repaid by selling the asset?
The interval between the purchase and the sale: assets that are the subject of a trade will normally (but not always) be sold quickly. Consequently, the intention to sell an asset shortly after sale will suggest trading. However, where the intention is to hold the asset indefinitely, it is less likely to be the subject of a trade.
Method of acquisition: an asset that is acquired by way of inheritance or as a gift is less likely to be the subject of a trade.
It is important to note that the above is not a checklist and it is not necessary for every badge to be present for there to be a trade. Further, no particular badge is conclusive evidence of a trade. Rather, it is a case of considering each badge and whether it is present or absent to form an overall impression of whether a trade exists.
If you are earning a small amount of money from your hobby, for example, making and selling occasional birthday cakes, it is unlikely that you will need to tell HMRC. The trading allowance means that if the income from your self-employment is less than £1,000 you do not need to report it to HMRC. However, it should be noted that each person is only allowed one trading allowance across all sources of self-employment. Consequently, a person who is already self-employed and earning more than £1,000 will need to pay tax on any income from a hobby business, even if the income from the hobby is less than £1,000 a year.
If your income from your business for the tax year is more than £1,000, you will need to register for self-employment by 5 October after the end of the tax year.
Help if you are struggling to meet your tax bills
Inflation is at a ten-year high and the ensuing cost of living crisis means that many people may be struggling to pay the tax that they owe. If this is you, what can you do about it?
While it may be tempting to bury your head in the sand and hope that the bill will magically disappear, this is a really bad idea. Ignoring the problem will in this instance make it worse; HMRC will eventually want their money and have a range of tools available to them to help them achieve this.
It is far better to take control of the situation. Rather than having to pay everything in one go, you may be able to pay in manageable instalments.
Set up an online plan
If you are struggling to pay a self-assessment tax bill you may be able to set up an instalment plan (known as a Time to Pay arrangement) online. To do this, you will need to log in to your Government Gateway account.
A Time to Pay agreement can be set up online if:
you have filed your latest tax return;
you owe less than £30,000;
you are within 60 days of the payment deadline; and
you plan to pay your debt off within the next 12 months or less.
If you are not able to set up an instalment payment plan online, for example, because you owe tax of more than £30,000 or need longer to pay, you can call HMRC’s Self-Assessment helpline to see if you are able to agree one over the phone. The Self-Assessment Payment Helpline number is 0300 200 3822. The helpline is open from 8a.m. to 6p.m. from Monday to Friday.
You will need certain information to set up a Time to Pay arrangement, including:
your unique tax reference (UTR) number;
your bank account details; and
details of any payments you have missed.
HMRC will ask you whether you can pay in full (if you can, they will expect that you do), how much you can repay each month, if you owe other taxes, how much you earn, what your monthly outgoings are and what savings and investments you have. If you have assets or savings, HMRC expect that you will use these to pay any tax that you owe.
Stick to the plan
Once you have agreed a Time to Pay arrangement, it is important that you make the payments in accordance with the plan, If you miss a payment HMRC will normally contact you to find out why, and where possible will restore the plan. However, if you continue to fault, HMRC will seek to collect the debt in full.
If further tax liabilities arise that you cannot pay, it may be possible to amend the plan to include these.
Take advantage of the rent-a-room scheme
If you are feeling the pinch and you have a spare room in your home, you may consider renting it out to earn some additional money to help meet your living costs. As university and college terms start, now is a good time to let as students will be looking for accommodation. Even better, the rent-a-room scheme enables you to earn the money you receive from letting the room tax-free.
You cannot use the scheme if you let the room unfurnished (but you may qualify for the property letting exemption of £1,000 instead). You cannot benefit from this allowance and also rent-a-room at the same time.
Nature of the scheme
If you let out a furnished room, or furnished rooms, in your own home, you can earn rental income of up to £7,500 tax-free each tax year. If two or more people share the rental income, each has a tax-free limit of £3,750. The limit remains at £3,750 each even if three or more people share the income and the total tax-free amount exceeds £7,500.
If you earn less than the threshold, the exemption is automatic. You do not need to tell HMRC, or report it on your tax return.
Rental receipts exceed the threshold
If your rental receipts exceed the tax-free threshold (£7,500 for one person; £3,750 for two or more people), you can still benefit from the scheme.
Instead of working out your taxable profits by reference to your rental income less your expenses, you are taxed on the extent to which your rental income exceeds the rent-a-room threshold. This is beneficial if the threshold is more than your actual expenses, as claiming rent-a-room relief will reduce the taxable profit and hence the tax payable.
However, where the rental income exceeds the threshold, you will need to complete a tax return. To claim rent-a-room relief, you can opt into the scheme when completing your tax return.
Transferring assets between spouses
Although spouses and civil partners are taxed independently, there are some tax breaks available. One of these is the ability for spouses and civil partners to transfer assets between them at a value that for capital gains tax gives rise to neither a gain nor a loss.
This can be very useful from a tax planning perspective.
No gain/no loss rule - The no gain/no loss rule essentially means that where an asset is transferred from one spouse to another, the value of that asset is equal to the transferor’s base cost. This is the case regardless of whether there is any actual consideration and the amount of that consideration. Unlike other transfers between connected persons, the market value rule does not apply.
The effect of this rule is that any gain that has accrued while the transferor has owned the asset is passed to the transferee and is not chargeable on the transferor. The gain does not crystallise until the asset is disposed of outside the marriage or civil partnership.
Example - Peter purchased a painting in 2013 for £6,500. In 2018, he transferred the painting to his wife Pauline. At that time, the painting was worth £9,000. Pauline sells the painting at auction in August 2022 for £12,000.
When Peter transfers the painting to Pauline in 2018, it is deemed to be transferred at a value of £6,500. This is the Peter’s base cost and the value that gives rise to neither a gain nor a loss. Pauline assumes Peter’s base cost of £6,500. There is no capital gains tax to pay on the increase in value of £2,500 during Peter’s period of ownership.
When Pauline sells the painting in 2022, the full gain of £5,500 is chargeable (£12,000 - £5,000). Pauline is liable for the full gain, not just the increase in value since she acquired the painting.
Pauline realises no other gains in the tax year, and the gain is sheltered by her annual exempt amount.
If the painting had fallen in value to below £6,500, Pauline would have the benefit of the loss.
Tax planning opportunities - This rule opens up a number of tax planning opportunities.
Access unused annual exempt amounts - Transferring an asset or a share in an asset prior to disposal can access a spouse or civil partner’s unused annual exempt amount. The annual exempt amount for 2022/23 is £12,300. Using this strategy can save the couple up to £2,460 in tax (£12,300 @ 20%), or £3,444 for residential property gains (£12,300 @ 28%).
Make use of a lower tax band - Where a gain cannot be fully sheltered by available annual exempt amounts, if the spouses/civil partners have different rates of tax, the no gain/no loss rule can be used to share the chargeable gain so that it is taxed at the lowest rate of tax. For example, by taking this route, it may be possible to reduce the tax paid on some or all of the gain from 20% to 10%, or for residential property gains, from 28% to 18%.
Change income allocation - Income from an asset owned jointly by spouses and civil partners is taxed 50:50 regardless of the actual ownership shares, unless a Form 17 election is made. However, to ensure that income is taxed at the lowest possible marginal rates, the no gain/no loss rules can be used to change the underlying ownership to the desired shares. A Form 17 election can then be made so the individuals are taxed on the income by reference to those shares.
Access business asset disposal relief - Business asset disposal relief reduces the rate of capital gains tax to 10% on qualifying gains up to the £1 million lifetime limit. Each spouse or civil partner has their own limit. To access each partner’s limit, assets or shares can be transferred from one spouse or civil partner to the other prior to the disposal of the business or its shares. However, remember the conditions must be met for two years prior to the disposal meaning it is necessary to plan ahead.
Changing company accounting periods - the implications
The usual method of incorporation is via Companies House WebFiling or Company Formation Agent (although paper submissions are still accepted). If incorporating via WebFiling there is the added benefit of HMRC automatically being notified by Companies House when a new company has been formed. HMRC will then usually issue a 'Notice to deliver a tax return' confirming the reporting date of the first accounts. In most cases, the notice period coincides with an accounting period of the company and a return is then submitted for a matching period.
The first accounting period usually covers more than 12 months because the starting date is the date that the company was incorporated ending on the ‘accounting reference date’, i.e. the last day of the month the company was set up. In the following years, the accounting reference date will normally cover the company’s financial year.
Example - If a company is incorporated on 11 May 2022, its accounting reference date will be 31 May 2023, so the first accounts cover 12 months and 3 weeks. The accounts will be from 1 June to 31 May in the following years.
Although Companies House sets the accounting period dates, the dates covering the first tax return will depend on whether or not the company started trading on the same day that it was incorporated. This because a company usually first comes within the charge to corporation tax when the company commences a trading activity. However, an accounting period will also be deemed to have commenced as soon as the company acquires a source of income (which could be the opening of an interest-bearing bank account).
Shortening the accounting period - The period covered by a tax return (the ‘accounting period’ for Corporation Tax) cannot be longer than 12 months. So to cover the first accounting period two tax returns may have to be filed (in the above example one for the year ended 10 May 2023 and another for the period 11 May 2023 to 31 May 2023); if so, there will also be two payment deadlines. Only one return will be required in the following years -- usually covering the same financial year as the accounts. The submission of two tax returns for just a few weeks (sometimes days) can be made more accessible by applying to shorten the accounting period to the end of the month before. Therefore, in the example above by applying to shorten so that the end date is the last day of the month before, only one set of accounts is required for the period 11 May 2023 to 30 April 2024 and also only one tax return and one tax payment.
Late submission of accounts to Companies House results in an automatic penalty of £150. Successful appeals against such penalties are rare. Of course the way to avoid a penalty is to submit the accounts on time. However, if you can see that you will not be able to make the deadline for whatever reason there is a way to avoid any penalty by shortening the accounting reference date, gaining an additional three months to submit.
When the accounting reference date is shortened the new deadline for filing accounts at Companies House becomes the longer of:
nine months from the new accounting reference date; or
three months from the date of receipt of the application form AA01 (change the accounting reference date).
Therefore if the accounting reference date is shortened by just one day that gains an additional three months in which to submit the accounts. In addition, the rules allow accounts to be made up to seven days on either side of the accounting reference date so these accounts can be submitted as prepared with no alterations required.
Importantly, the change to AA01 form must be received by Companies House before the date that the accounts are due initially and therefore, this method cannot be used if the filing deadline has passed.
Example - A company's year-end (Accounting Reference Date) is 31st March 2022.
The deadline for submission to Companies House is 31 December 2022.
However, the directors confirm that the accounts cannot be submitted by that date and wish to apply to shorten the accounting period.
An application is made to Companies House on Application form AA01 to shorten the accounting reference date by one day to 30 March 2022.
Accounts can be made up to seven days either side of the original accounting date and therefore the accounting reference date remains as 31 March 2022.
The revised submission deadline will be three months from the date that the AA01 is filed. Therefore, in this scenario, if form AA01 was submitted on 23 December 2022 the revised filing date will be 22 March 2023.
The next set of accounts to the year ended 31 March 2023 would need to be filed by 30 December 2023.
Different lets, different tax rules
National Insurance changes for the self-employed
If their profits are high enough, the self-employed pay two classes of National Insurance contribution – Class 2 and Class 4.
Class 2 contributions are flat rate contributions of £3.15 per week for 2022/23. It is the payment of Class 2 contributions that enables a self-employed earner to build up entitlement to the state pension and certain other contributory benefits. Class 4 contributions are payable on profits in excess of the lower profits limit, but do not garner any pension or benefit entitlement.
Lower profits limit for Class 4
The lower profits limit for Class 4 contributions is aligned with the primary threshold for Class 1 National Insurance contributions. This is set at £190 per week for the period from 6 April 2022 to 5 July 2022 (equivalent to £9,880 per year), rising to £242 per week (equivalent to £12,570 per year and aligned with the personal allowance) from 6 July 2022. The annualised primary threshold is £11,908. Consequently, the lower profits limit for Class 4 is set at £11,908 for 2022/23.
Class 4 contributions are payable at the main rate, which is 10.25% for 2022/23, on profits between the lower profits limit and the upper profits limit, which at £50,270 is aligned with the upper earnings limit for Class 1 contributions. Any profits in excess of the upper profits limit attract Class 4 contributions at the additional Class 4 rate, set at 3.25% for 2022/23.
Higher starting point for Class 2
Historically, a liability to Class 2 contributions has arisen where profits exceed the small profits threshold, which for 2022/23 is set at £6,725. However, the starting point for Class 2 contribution is to be increased with retrospective effect from 6 April 2022 to align it with the starting point for Class 4 contributions. For 2022/23, this is £11,908.
As Class 2 contributions earn entitlement to the state pension, self-employed earners who have profits between the small profits threshold, set at £6,725 for 2022/23, and the new starting limit of £11,908 will be treated as if they had paid a Class 2 contribution. This means they get the benefit of having paid a Class 2 contribution, but for zero contribution cost. This move brings the position of the self-employed with low profits broadly into line with that for employed earners with low earnings who are treated as having paid Class 1 contributions at a notional zero rate on earnings between the lower earnings limit (£6,396 for 2022/23) and the primary threshold (£11,908 for 2022/23).
Self-employed earners with profits below the small profits threshold can opt to pay Class 2 contributions voluntarily to maintain their contribution record. At £3.15 per week for 2022/23, this is a much cheaper option that paying voluntary Class 3 contributions, which are set at £15.85 for 2022/23.
The Class 4 rates were increased by 1.25 percentage points for 2022/23 only pending the introduction of the Health and Social Care Levy. The rates are due to revert to 9% (main rate) and 2% (additional rate) from 2023/24. However, the self-employed will also have to pay the Health and Social Care Levy of 1.25% on profits in excess of the lower profits limit from 2023/24, so the total hit remains the same in 2023/24 as in 2022/23. However, unlike Class 4 contributions, liability to the Health and Social Care Levy remains beyond state pension age.
Pros and cons of the VAT flat rate scheme
The flat rate scheme offers VAT registered traders who meet the eligibility conditions a simpler way to work out the VAT that they need to pay over to HMRC. However, while it may save work, it may also cost more than working out VAT in the traditional way.
Nature of the scheme - Under the scheme, traders pay a percentage of their VAT-inclusive turnover over to HMRC, rather than working out the difference between their output VAT and their input VAT. The percentage that they pay is set by HMRC and depends on the business sector in which they operate.
Eligibility - The scheme is only open to VAT-registered businesses which expect their annual VAT taxable turnover to be £150,000 or less. This is the total of everything that they sell that is not exempt from VAT, and is exclusive of VAT. A trader cannot re-join the scheme if they have left it in the previous 12 months.
Once in the scheme, a trader can remain unless their turnover in the last 12 months was more than £230,000 including VAT, or they expect their turnover in the next 30 days alone to be more than £230,000 (including VAT). If this is the case, the trader must leave the flat rate scheme and work out VAT due to HMRC in the usual way.
Advantages - The main advantage of the scheme is that it is simple and that it saves work. There is no need to keep detailed records, particularly of VAT on purchases and expenses. The VAT that is paid over to HMRC is simply the flat rate percentage multiplied by the VAT-inclusive turnover in the period. The scheme may also save money if the VAT due at the flat rate is less than that using the traditional calculation.
Disadvantages - The main disadvantage is that more VAT may be payable to HMRC than if VAT is calculated in the traditional way. This will be the case if the amount determined using the flat rate percentage is more than the difference between output VAT and input VAT in the period. Much will depend on whether the traders input VAT is covered by the margin allowed by the flat rate percentage.
The scheme can be particularly costly for limited cost businesses. These are business where goods are less than either 2% of turnover or £1,000 a year (£250 per quarter). Limited cost businesses must use a higher rate of 16.5% to work out the VAT that they pay over to HMRC, regardless of the sector in which they operate.
The rules can operate harshly for limited cost businesses. In deciding whether a business is a limited cost business, no account is taken of spending on services on which VAT is incurred. The flat rate percentage for limited cost businesses of 16.5% of VAT-inclusive turnover is equivalent to 19.8% of net turnover, leaving little margin for input VAT recovery as 99% of the VAT charged at 20% must be paid over to HMRC. This may be problematic for a business that spends little on goods but which incurs significant VAT on services and items such as fuel and promotional items, which are excluded from the calculation. Where this is the case, the trader may pay much more VAT over to HMRC than under traditional VAT accounting.
Do the sums - In order to decide whether the time savings offered by the VAT Flat Rate Scheme are worthwhile, there is no substitute for doing the sums.
Personal Bills – What’s The Tax And NIC Position?
Ensuring that your company & its assets are 100% IHT free
Business Property Relief (BPR) is an attractive inheritance tax (IHT) relief potentially providing 100% tax relief in respect of qualifying assets (termed 'relevant business property') relating to both lifetime transfers of business assets or in the death estate, providing, of course, certain provisions apply. Different conditions apply depending on whether the assets are transferred during the donor's lifetime or on death.
BPR works by offsetting the value attributable to the 'relevant business property' when calculating the taxable estate by a percentage of either 50% or 100% (depending on the type of business property) as follows:
Shares in an unquoted trading company
Such shares should qualify for BPR in full, providing the shares have been held for at least two years and there is no binding contract in place to sell the shares. However, where there is more than one shareholder of a private limited company, understandably many such shareholders have a binding agreement to ensure the company's continuity. Such agreements state that should a shareholder die, their personal representatives are required to sell the shares to the surviving shareholder(s). If such a binding agreement is in place then the shares will not qualify for BPR because the personal representatives are no longer considered to own the shares. Where this happens the value of the right to receive the proceeds is included in the estate, and is taxable in full as the right is not 'relevant business property'.
Rather than having a binding agreement, the agreement should be made optional, providing the estate with an option to sell, and the remaining shareholders the option to buy. Care should be taken that the agreements are not made on the same day (or nearly the same day) otherwise HMRC could deem the agreement to be an ordinary agreement for sale. The termination dates for the estate’s and the shareholders’ options need to be different.
Land and Buildings
Many company's operate out of land or buildings owned by a shareholder personally. Such assets also do not automatically attract BPR; they are only 'relevant business property' where the transferor controls the company. As a 50% shareholder does not control a company, BPR will not apply. A planning point will be to ensure that should BPR be required that the shareholder must retain at least 51% shareholding.
Furnished holiday lets
For income tax purposes the operation of a furnished holiday let (FHL) is deemed to be a business and not a property income investment. As such any qualifying FHL qualifies for capital gains tax relief on sale under Business Asset Disposal Relief. However, just because the lettings are deemed a business for income tax and CGT purposes does not mean that the business also qualifies for BPR. HMRC’s view is that furnished holiday lets generally do not qualify for BPR stating that income derived from such businesses largely comprises rent in return for the occupation of property and as such is an investment rather than a trading business. However, they appreciate that there may be some cases where the level of additional services provided is 'so high that the activity can be considered as non-investment', and, as ever, 'each case needs to be treated on its own facts'.
Therefore, to succeed in a claim for BPR the burden of proof must necessarily be greater than required for either income tax or CGT. HMRC is more likely to allow relief where the lettings are short term (e.g. weekly or fortnightly) and the owner (either themselves or a relative or housekeeper) has been substantially involved with the holidaymaker(s) in terms of their activities on and from the premises even if the lettings were for part of the year only. Merely providing maintenance, cleaning, etc. will not be enough. HMRC's guidance states that the business needs to be looked at 'in the round' when deciding whether 'the holding of property as investment was the main component of the business. If it was not, then the business was entitled to business relief'.
Is frequently moving homes a business?
The First-tier Tribunal (FTT) recently considered whether money from property sales was trading income or capital gains, and if private residence relief was due. The FTT ruling provides useful guidance on both issues
Serial property sales - Mr Campbell (C) bought and sold four properties in little over five years. He made a substantial profit from the transactions which he declared as capital gains. He claimed private residence relief (PRR) against each gain, meaning that in his view there was no tax to pay. HMRC disputed that the profits were capital gains, arguing instead that C was trading as a property developer and so any profits were liable to income tax to which, of course, PRR cannot apply. HMRC also argued that even if the profits were capital gains PRR wasn’t due as C hadn’t lived in the properties.
Trading or not? - For HMRC to succeed at the First-tier Tribunal (FTT) it had to show that one or more of the generally accepted tests established by case law, known as the “badges of trade”, applied to C’s buying and selling of properties. While some of these applied, e.g. there were multiple transactions and C had spent money improving the properties to varying degrees, the FTT decided that on balance the money made by C wasn’t trading income.
Mitigating factors - In arriving at this decision it took account of the fact that C was employed full time in work not related to property development and had not been engaged in such activities elsewhere. We’re not so sure the FTT’s decision was right. However, it is a reminder that where there’s doubt tribunals will usually come down in favour of the taxpayer.
While the existence of one badge of trade can be enough to confirm an activity as trading it doesn’t automatically do so despite HMRC’s assertion. As in this case it’s possible for more than one badge of trade to apply without an activity counting as trading.
Private residence relief - Having dodged the “trading” bullet C’s claim for PRR was now in the line of fire. Here his luck ran out. C had argued that although he had not lived in the properties PRR applied because it was his intention to but he was prevented because he lived in job-related accommodation. This is one of the exceptions that allows PRR for periods of absence from your home but the FTT decided the alleged job-related accommodation was actually C’s home. Several factors indicated this, not least was that in his evidence C referred to the accommodation as his home. The property was his parents’ home and C lived there not because of his work but to look after his father with dementia.
It’s worth noting that had C’s claim for PRR not failed for the reasons we’ve explained, HMRC had a further argument in reserve. Legislation specifically precludes PRR for gains made from properties specifically purchased for the purpose of making a gain. If this argument had been needed we think it would have had a better than 50/50 chance of succeeding.
HMRC failed to show that buying, improving and selling properties for a profit was trading. The FTT said the tests for trading activity were not met. However, HMRC won its argument that private residence relief didn’t apply. The taxpayer’s argument that he didn’t live in the properties as he was in job-related accommodation wasn’t believable.
Involuntary strike-off: what can you do?
The registrar of companies has the power to strike a company off a register if the registrar has reasonable cause to believe that the company is no longer carrying on a business or is in operation. This may be the case if the company has failed to file its annual accounts or its annual confirmation statement, there is no director in place or mail sent to the company is returned unopened.
However, before the registrar can move to strike the company off, he or she must first send two letters to the company. If a response is not received from the company within one month of sending the first letter, the registrar must (within 14 days of the end of the expiration of that month) send a second letter by registered post. The second letter must refer to the first letter and state that an answer to that letter has not been received and also that if an answer is not received to the second letter within one month of the date on the letter, a notice will be placed in the Gazette with a view to striking the company’s name off the registrar. If letters are received, they should not be ignored; rather, they should be dealt with promptly.
In the event that no answer is received to the second letter within a month of the date of that letter and the registrar has not received evidence that the company remains in business, the registrar will place a first notice in the Gazette that unless evidence is received to show that the business is still in operation, it will be struck off the register two months after the date of the notice.
An objection to the proposed striking off can be made after the notice has been placed in the Gazette. An objection can be made by a director or a shareholder, or another interested party, such as a supplier or a customer. The objection can be made by email (email@example.com).
When making an objection, it is necessary to provide evidence that the company is still trading, is owed money or owes money. The evidence may be in the form of customer or supplier invoices or statements or company bank statements. If the striking off application has been made because the company has failed to file its accounts or its confirmation statement, the outstanding documents should also be filed.
The objection must be made at least two weeks before the expiry of the Gazette notice (which is two months from the date of publication of the notice).
If the objection is successful, the registrar will discontinue the strike and file form DISS40, Striking off action discontinued.
Company struck off
If no objection is made by the expiry of the first notice, a second notice will be posted in the Gazette, stating that the company has been struck off. It will be dissolved on the publication of this notice.
Capital allowances for cars
Capital allowances are a mechanism for providing tax relief for capital expenditure.
Relief is generally given in the form of a writing down allowance, although a first year allowance is available for expenditure on new and unused zero-emission cars. Expenditure on cars does not qualify for the annual investment allowance or for the time-limited super-deduction or 50% first-year allowance available to companies. Capital allowances cannot be claimed where the simplified expenses system is used to pay mileage allowances.
Capital allowances for cars can be claimed by both unincorporated businesses and companies. They can also be claimed where the cash basis is used as expenditure on cars cannot be deducted under the cash basis capital expenditure rules.
A 100% first-year allowance is available for expenditure on new and unused zero-emission cars. This means that the cost can be deducted in full in computing taxable profits in the period in which the expenditure is incurred.
The first-year allowance is only available for new cars; second-hand zero-emission cars only qualify for a writing down allowance.
A balancing charge, equal to the sale proceeds, will arise if the car is sold.
Writing down allowances
There are two rates of writing down allowance – the main rate and the special rate. The available rate depends on the car’s CO2 emissions and the date on which the expenditure was incurred.
New and used cars purchased on or after 6 April 2021 which have CO2 emissions of 50g/km or less (other than new electric cars qualifying for a 100% first-year allowance) are added to the main rate pool and receive main rate allowances at the rate of 18% on a reducing balance basis.
Cars purchased on or after 6 April 2021 with CO2 emissions in excess of 50g/km must be added to the special rate pool. They attract special rate writing down allowances of 6% on a reducing balance basis.
If the car is sold, the sale proceeds must be added to the relevant pool. This ensures that capital allowances are given for the difference between the cost and the proceeds over the life of the car.
If a sole trader or partner uses a car partly for business and partly for private use, capital allowances are proportionately reduced to reflect the private use. Cars used for business and private use have their own pool rather than being added to the main rate or special rate pool.
Employees are not able to claim capital allowances for cars, even if they use them for business. The approved mileage rates (which may be paid tax-free up to the approved amount) provide an element to cover depreciation.
Common deductible business expenses
No-one wants to pay more tax than they need to. Consequently, it is important to keep good records of business expenses so that deductible expenses are not overlooked.
General rule - The basic rule is that a deduction is allowed for expenses incurred wholly and exclusively for the purpose of the trade, profession or vocation. Unlike the equivalent rule for employment expenses, there is no requirement that the expense is ‘necessarily’ incurred. This means that as long as an expense is incurred for the purposes of the business and only for that purpose, a deduction is given.
Private expenses are not deductible - No deduction is given for private expenditure and under no circumstances should private items be `put through the business’. It is good practice to keep private and business expenditure separate and to have a separate bank account for business expenses. If you run your business as a limited company, the company should have its own bank account.
Mixed use expenses - If you incur an expense for both business and private purposes, you can deduct the business element if this can be separately identified. This may be the case if you use a phone for business and private calls. Any apportionment should be on a just and reasonable basis. If you cannot separate out the private use and the expense has a dual purposes (such as work clothes which also provide warmth and decency), the expense should not be deducted.
No deduction for drawings - If you operate your business as a sole trader or other unincorporated business and you pay yourself a salary or take drawings from the business, you cannot deduct these when working out your profit. You pay tax on your profit and are free to use the profits as you please. However, if you operate as a personal or family company, you can deduct any salary that you pay yourself (together with any employer’s National Insurance and employer pension contributions).
Capital expenditure - Capital expenditure can only be deducted in computing profits if you use the cash basis and the expenditure can be deducted under the cash basis capital expenditure rules. You cannot deduct capital expenditure if you prepare accounts under the accruals basis.
Common deductible expenses - The actual expenses that can be deducted will vary from business to business – what is important is that they are incurred wholly and exclusively for the purpose of the business. However, the following are example of common deductible business expenses.
1. Cost of goods sold, such as raw materials and goods brought for resale.
2. Distribution and packaging costs.
3. Office expenses, such as stationery and printing costs and phone bills.
4. Travel and subsistence expenses, such as fuel parking and fares for using public transport.
5. Motor expenses, such as car insurance, MOTs and repairs.
6. Staff costs, such as wages, salaries, employer’s National Insurance and pension costs.
7. Rent and rates.
8. Gas, electricity and water bills.
9. Repairs to business expenses.
10. Advertising and promotion costs.
11. Bank interest and other finance costs.
12. Accountancy, legal and other professional costs.
13. Uniforms (but not general clothing even if only worn for work).
Non-deductible expenses - A deduction for certain expenses is expressly prohibited. This includes the cost of business entertaining, which if deducted in computing accounting profit must be added back to arrive at taxable profit. Likewise, depreciation (an accounting concept) is not deductible in arriving at taxable profit; instead relief is given in the form of capital allowances.
CIS and property investment companies
The Construction Industry Scheme (CIS) is a tax deduction scheme under which tax is deducted from payments made to subcontractors for construction work unless the subcontractor is registered with HMRC for gross payment status. HMRC recently published guidance on the application of the CIS to property investment companies after it came to their attention that many property investment companies undertaking substantial redevelopments were unaware that they needed to register as a contractor within the CIS.
A property investment company will need to comply with the CIS if it is acting as a contractor. Failing to register for, and comply with, the scheme may result in an unexpected tax liability which it might be unable to recover from the subcontractor.
Property developers - The work of a property developer is the creation of new buildings or the renovation or conversion of existing buildings. Consequently, they will fall within the definition of a mainstream contractor for the purposes of the CIS. As a result, they should register as a contractor and apply the CIS.
Speculative builders should also register a contractor for the purposes of the CIS as their work involves the creation or renovation of buildings.
Property investment companies - Property investment companies acquire and dispose of buildings for a capital gain or acquire buildings which they rent out to generate rental income. Unlike a property developer, they may not undertake construction work, and consequently, a property investment company will not necessarily fall with the ambit of the CIS.
However, this will not always be the case and the CIS should not simply be dismissed as ‘not relevant’. Where the property investment company’s property estate is large enough, the expenditure that it incurs on construction operations may be sufficient for it to fall within the scope of the CIS as a deemed contractor. A deemed contractor is a non-construction business that spends more than £3 million in a rolling 12-month period on construction operations. A deemed contractor must register and operate the CIS.
However, if the spend on construction operation is less than £3 million in a 12-month period, the property investment company will not be a deemed contractor and will remain outside the CIS scheme, as long as its main business remains property investment rather than property development.
Example - A property investment company acquires a former warehouse which it renovates and converts into flats before letting them out. The cost of the construction operations exceeds £3m in a 12-month period. The property investment company must register as a deemed contractor under the CIS and operate the scheme.
Change in the nature of the business - Where a property investment company enters into substantial or multiple construction contracts, they may need to assess whether their business has changed and they have become a property developer. If this is the case, they may need to register as a mainstream contractor under the CIS, even if they revert to being a property investment company once the construction work has concluded. Consideration should be given to what is the main nature of the business at that particular time.
Take advantage of the dividend allowance
Where a business is operated as a family company, it is necessary to extract the profits from the company in order to use them outside the company for personal use, such as to meet living expenses. Extracting profits may trigger further tax and National Insurance liabilities, and when formulating a strategy, it is advisable to extract profits in as tax-efficient manner as possible. What this will look like will, to a certain extent, depend on individual circumstances. However, that said, a popular and tax-efficient profit extraction strategy is to take a small salary and extract further profits as dividends.
For 2022/23, assuming the personal allowance is not used elsewhere, the optimal salary is equal to the primary threshold of £11,908 where the employment allowance is not available and equal to the personal allowance of £12,570 where the employment allowance is available to shelter employer’s National Insurance.
The dividend allowance is not an allowance as such. Rather, it is a zero-rate band. Where dividends fall within this band, they are taxed at a zero rate so that they are free of tax in the hands of the shareholder. The dividend allowance is available to all taxpayers, regardless of their marginal rate of tax. For 2022/23, the dividend allowance is set at £2,000. Dividends are taxed as the top slice of income and the dividend allowance uses up part of the tax band in which it falls.
In a family company scenario, the availability of the dividend allowance can be used to drive dividend policy. However, when paying dividends to utilise available dividend allowances, it should be remembered that dividends can only be paid out of retained profits and must be paid in accordance with shareholdings. This can be overcome by the use of an alphabet share structure by which each shareholder has their own Class of shares, e.g. A ordinary shares, B ordinary shares, C ordinary shares, etc, and which provides flexibility to tailor dividends to individual circumstances.
Dividends are paid from post-tax profits and have already suffered corporation tax.
To prevent dividend allowances being wasted and optimise the opportunity to extract profits without triggering further tax liabilities, in a family company scenario it makes sense to make family members shareholders, even if they have other income and do not work in the company. The benefits are illustrated by the following case study.
Dave is the director of a family company DJ Ltd. His wife and two grown-up daughters are shareholders in the company. Dave has 100 A ordinary shares, his wife has 100 B ordinary shares and his daughters, Delia and Diane, have, respectively, 100 C ordinary shared and 100 B ordinary shares.
The company has made a post-tax profit of £20,000 that Dave wishes to extract. Dave has received a salary of £12,570 from the company, as does his wife, Debbie. Both Dave and Debbie have income from property and pay tax at the higher rate.
If a dividend of £200 per share is declared for A class shares, Dave will receive a dividend of £20,000. After deducting the dividend allowance of £2,000, the balance of £18,000 is taxed at 33.75% -- a tax bill of £6,075.
If, instead, the company declares a dividend of £1,400 per share for A class shareholders and a dividend of £20 per share for B, C and D Class shareholders, Dave will receive a dividend of £14,000 and his wife and daughters will each receive a dividend of £2,000.
In this scenario, Dave will pay tax of £4,050 on his dividend (33.75% (£14,000 - £2,000)). However, his wife and daughters will receive their dividends tax-free as they are sheltered by their dividend allowances.
By using an alphabet share structure and taking advantage of family members’ dividend allowances, the combined tax bill has been reduced by £2,025.
If his daughters have not fully utilised their basic rate bands, changing the dividend mix to make use of this can produce further savings.
Lettings relief – do you qualify?
In the halcyon days of buy-to-let ownership, landlords were able to benefit from lettings relief if they sold a let property which at some point had been their only or main residence. This could reduce the chargeable gain by as much as £40,000. While the relief still exists, it is now only available to landlords who have shared their home with a tenant.
Nature of the relief
If an individual lives in their home at the same time as a tenant, for example, if they let out a room or several rooms while continuing to occupy the property, they may be able to benefit from lettings relief in addition to private residence relief. It should be remembered that the let part does not qualify for private residence relief.
The amount of lettings relief to which an individual is entitled is the lower of the following three amounts:
James has a large four bedroom home. He lets one double bedroom and an en-suite bathroom to a tenant. The room was let out for the whole time that James owned the property. The bedroom and bathroom account for 12% of the floor area of the property.
James purchased the property in August 2017 for £500,000. He sells it in August 2022 for £750,000.
James realises a gain of £250,000 of which 88% is covered by private residence relief. This amounts to £220,000. The remaining gain of £30,000 (12%) relates to the let portion. As the room was let while James lived in the property, lettings relief is available.
This is equal to the lower of:
The lettings relief is therefore £30,000. This reduces the chargeable gain to nil, and James has no capital gains tax to pay when he sells his property.
Is a property company a tax-efficient option?
Tax changes in recent years to the way that unincorporated landlords are treated for tax purposes, particular in respect to relief for interest, have resulted in an increase in the number of landlords operating their property rental business through a company. Is this a good idea?
We take a look at some of the issue to consider in reaching a decision.
Separate legal identity - A company has a separate legal identity to those who own it. A company must be registered at Companies Houseand must file annual accounts and an annual confirmation statement. The individuals behind the company must extract any profits if they wish to use them personally, and this may have a tax cost.
Incorporating an existing business - If the landlord already has an unincorporated property rental business, he or she may simply choose to incorporate it. However, SDLT will be payable again (having already by paid on initial purchase by landlord); and as the company is connected to the landlord, this will be on the market value of the property, and for a residential property at the additional property rates as the 3% supplement applies regardless of the number of residential properties that the company has.
Transferring the property to a company may also trigger a capital gains bill on the landlord personally, again based on the market value of the property. However, where the landlord receives shares in exchange for the business, incorporation relief may be available deferring the gain until the shares are sold.
Setting up a new company - If the property company is set up from scratch and the property is brought by the company, this will avoid a double SDLT charge. If the property is a residential property, the 3% supplement will apply, even if the company only owns one property.
Tax on rental profits - A company will pay corporation tax on any rental profits. For the financial year 2022, this is at the rate of 19%, which is lower than the basic rate of tax. However, unlike an individual, a company does not have a personal allowance, and tax is payable from the first £1 of profit.
Also, from 1 April 2023, the rate of corporation tax for a stand-alone company rises above 19% where profits exceed £50,000. The rate will be 25% where profits are more than £250,000 and between 19% and 25% where profits are between £50,000 and £250,000.
Interest and finance costs - For residential lets (but not furnished holiday lettings) unincorporated landlords cannot deduct interest and finance costs. Instead, their tax bill on the rental profit is reduced by 20% of the interest and finance costs, regardless of their marginal rate of tax. The restriction does not apply to companies, who can deduct residential interest and finance costs in full in computing the taxable rental profit.
Extracting profit - Once tax has been paid by an unincorporated property business, the landlord can use the after-tax profits for personal use without further tax liabilities. However, as a company is a separate legal identity, if the landlord wishes to use the profits personally, these must be extracted. This can be done in various ways, such as the payment of a salary or bonus or by declaring a dividend, and there may be additional tax and National Insurance to pay on top of the corporation tax paid by the company.
Sale of the property - If an unincorporated landlord sells a residential let realising a chargeable gain, capital gains tax will be payable at the residential property rates. Where income and gains fall within the basic rate band, this is at 18% and where they exceed it, this is at 28%. The landlord can use any available annual exempt amount (set at £12,300 for 2022/23) to shelter the gain. Residential property gains must be reported to HMRC within 60 days of completion and the tax on the gain paid within the same window.
Where the gain is made by the company, it will be liable to corporation tax on chargeable gains (at the rate of 19% for the financial year 2022, and between 19% and 25% from 1 April 2023 depending on the level of profits). The company does not have an annual exempt amount to set against the gain.
Allocating income for tax when property is jointly owned
Property that is jointly-owned may be let out. As people are taxed individually, the income must be allocated in order to work out the tax that each joint owner is liable to pay. The ways in which income from jointly-owned property is taxed depends on the relationship between the owners.
Joint owners are not married or in a civil partnership - Assuming there is no property partnership, where property is jointly-owned by persons who are not married or in a civil partnership, the income arising from the property will normally be allocated in accordance with each person’s share in the property. Each person is taxed on the income that they receive.
Example - Andrew, Alison and Anthony are siblings who own a property together which is let out. Andrew owns 50% of the property, Alison owns 30% and Anthony owns the remaining 20%.
The property generates rental income of £10,000. The income is allocated as follows in accordance with the ownership shares:
Each is taxed on the share that they receive.
The joint owners do not have to share profits in accordance with their ownership shares – they can agree a different split. If they do, they are taxed on what they actually receive.
Spouses and civil partners - Where property is owned jointly by spouses and civil partners, the default position is that the income is treated as being allocated 50:50 for tax purposes, regardless of the amounts that they actually receive. This can be useful from a tax planning perspective where spouses or civil partners have different marginal rates of tax. The no gain/no loss capital gains tax rules can be used to transfer a small share in a property to a spouse or civil partner paying tax at a lower rate, transferring 50% of the income for tax purposes in the process.
Example - Frank is a higher rate taxpayer. He owns a property generating rental income of £20,000 a year. He transfers a 5% stake in the property to his wife Felicity, whose only income is a salary of £15,000. Frank and Felicity are each taxed on £10,000 of the rental income. Felicity pays tax at 20% on her share. Had the property remained in Frank’s sole name, he would have paid tax at 40% on the full amount of the rental income. Taking advantage of the rules saves them tax of £2,000 a year.
This rule does not apply to income from furnished holiday lettings.
Form 17 - Where spouses or civil partners own a property jointly in unequal shares, they can elect for the income to be taxed by reference to their underlying ownership shares. However, this is only possible where they own the property as tenants in common (and each own their own share); where the property is owned as joint tenants (and as such the owners have equal rights over the whole property), the income split remains 50:50.
The election is made on Form 17. It must be made by both spouses/civil partners jointly and they must declare that they own the property in the shares stated on the form. The income split takes effect from the date of the latest signature, and to be effective must reach HMRC within 60 days of the signature.
The ability to elect for income to be taxed in accordance with ownership shares opens up tax planning opportunities, particularly as use can be made of the capital gains tax no gain/no loss rules for transfers between spouses and civil partners to change the ownership slip without triggering a chargeable gain.